Pennsylvania Inheritance Tax

Pennsylvania is one of a handful of states that collects an inheritance tax. If you are a Pennsylvania resident, or if you own real estate or tangible property located in Pennsylvania, the people who inherit your property might have to pay a tax on the amount that they inherit. Whether they will have to pay the tax, and how much they will have to pay, depends on how closely they were related to you—the closer the family connection, the lower the tax rate.

Pennsylvania Inheritance Tax Rates

Every person or organization that inherits property is put into a category for Pennsylvania inheritance tax purposes. This classification determines the tax rate that is applied to the inherited property.

Spouses, Parents of Deceased Children, and Charitable Organizations: No Inheritance Tax Due

The following inheritors pay no inheritance tax:

• The surviving spouse of the deceased person
• Parents, adoptive parents, or stepparents who inherit from a deceased child 21 years of age or younger
• Charitable organizations and government entities.

Most Other Close Family Members Pay 4.5% Inheritance Tax, but Siblings Pay 12%

Most immediate family members pay 4.5% inheritance tax on the property they inherit. This category includes:

• The deceased person's children and their descendants (whether or not they have been adopted by others), as well as step-descendants
• The deceased person's parents and grandparents
• The deceased person's child's spouse, so long as the spouse has not remarried

However, siblings who are related by blood (including half-brothers and sisters) or adoption pay a notably higher tax rate of 12%.

Everyone Else Pays 15%

All other inheritors pay a tax rate of 15%. This includes aunts, uncles, nieces, nephews, cousins, brother-in-laws, sister-in-laws, friends, and anyone else who does not fall into a category with a lower rate.

Example: Annabel left $100,000 to various family members and friends when she died. She left $40,000 to her husband Tom, $30,000 to her son Gabriel, $20,000 to her sister Claire, and $10,000 to her nephew Allen. The inheritance tax affects her loved ones as follows:

• Her husband Tom pays nothing on the $40,000 he inherits, since he is her surviving spouse.
• Her son Gabriel must pay 4.5% tax on the $30,000 he inherits, or $1,350.
• Her sister Claire must pay the sibling tax of 12% on the $20,000 she inherits, or $2,400.
• Her nephew Allen must pay 15% tax on the $10,000 he inherits, or $1,500.

Filing the Pennsylvania Inheritance Tax Return

The Pennsylvania Inheritance Tax Return (Form Rev-1500) can be filled out online. (It must be printed out and signed, however, before it's filed.) The executor (if there's a will) or personal representative (if there's no will) is responsible for filing the return. Just one return is necessary, even if several people owe tax. The return is filed with both the Pennsylvania Department of Revenue and with the Register of Wills in the county where the deceased person lived.

The tax return is a complicated document, with lots of schedules on which the deceased person's property and liabilities are listed. As discussed above, different tax rates apply to different inheritors. Executors often seek expert help and advice from an experienced local attorney.

The tax return and payment are due nine months from the date of death, and late payments may trigger a penalty. The state will grant requests for an extension of time in which to file the return, but the tax itself must still be paid by the original due date. If the tax is paid early—that is, within three months of the death—you can take a discount of five percent, up to a cap. (See Form Rev-1500.)

Special Exemptions for Farms and Businesses

The Pennsylvania legislature has carved out inheritance tax exceptions for certain kinds of property. Farmland is exempt from inheritance tax, as long as the land is inherited by family members and continues to be used for agriculture for seven years. Small family-owned businesses (those that have fewer than 50 employees and assets valued at less than $5 million) are also exempt from inheritance tax, if they have been in existence at least five years, are inherited by family members, and stay in operation for another seven years. (72 Pa. Cons. Stat. Ann. § 9111.)